B twenty what?? While B21 is emerging, some were not even fully aware of the existence of B20. Why? Because these guidelines put in place by the Office of the Superintendent of Financial Institutions applies to mortgage insurers.
Before we can explain more about B21 we have to get you up to speed on the lingo so you can follow the changes and what they may or may not mean to you.
• OSFI = The Office of the Superintendent of Financial Institutions
• FRMI = Federally-Regulated Mortgage Insurer
• RMIUP = Residential Mortgage Insurance Underwriting Plan
We all know that the purpose of mortgage default insurance and of B21 is to tighten up guidelines since much of the exposure that an insurer faces is as a result of its “mortgage insurance underwriting policies, practices and risk management” according to the OSFI. The B21 sets out the expectations for all FRMIs to follow as it relates to underwriting and related activities.
Lenders, mortgage brokers and agents - this should matter you! If you fund high ratio insured deals the B21 will likely somewhat change the way insurers underwrite your applications.
Insurers – this is your opportunity to prepare for new guidelines and pursue the technology and tools that will make it easier to meet the new guidelines with the least amount of new workflow.
Part II of the guideline sets out 6 fundamental principles for sound mortgage underwriting – here they are as posted on the PSFI website:
• Principle 1: Residential Mortgage Insurance Underwriting Plan - A FRMI that is engaged in residential mortgage insurance underwriting should have a comprehensive Residential Mortgage Insurance Underwriting Plan (RMIUP). The FRMI’s insurance underwriting practices and procedures should comply with its established RMIUP.
• Principle 2: Establishing Standards for the Initial Assessment and Qualification of Mortgage Lenders - A FRMI should establish sound standards for the purpose of initially assessing and qualifying mortgage lenders for mortgage insurance coverage.
• Principle 3: Mortgage Insurance Criteria and Insurance Coverage Requirements for Lenders - A FRMI should establish prudent underwriting criteria, which specify the characteristics and parameters of insurable mortgage loans for lenders. In addition, a FRMI should promote sound mortgage underwriting and loan management practices by mortgage lenders by establishing prudent requirements in its insurance policies (e.g., Master Policy Agreements) for the purpose of controlling risk.
• Principle 4: FRMI’s Periodic Assessments of Lenders’ Underwriting Practices - A FRMI should exercise reasonable due diligence regarding lenders’ underwriting practices, on a periodic basis, in order to assess consistency with the FRMI’s criteria for insuring mortgage loans and compliance with the requirements contained in the FRMI’s policy coverage documents. A FRMI should establish clear policies for identifying, escalating, and as needed, addressing weak or non-compliant lender practices.
• Principle 5: Assessment and Validation of Underwriting Systems, Models, and Underwriters’ Processes - A FRMI that is engaged in residential mortgage insurance underwriting should periodically assess and validate its insurance underwriting systems, models, and underwriters’ processes, to ensure sound insurance underwriting outcomes and consistency with the FRMI’s RMIUP.
• Principle 6: Effective Portfolio Risk Management and other Risk Mitigation - FRMIs should have effective portfolio risk management practices, including the use of stress testing and, as appropriate, the use of reinsurance. Given the objectives and risk appetite established in the RMIUP, a FRMI should consider the outcome of stress-testing and risk mitigation in appropriately setting or adjusting its mortgage insurance underwriting criteria.
Look forward to future blogs where we will delve into some of the specific guidelines and what they mean to different parties involved in a mortgage transaction and also what technologies and tools stand to make compliance easier.
For more reading on this topic you can visit:
• http://www.osfi-bsif.gc.ca/Eng/fi-if/rg-ro/gdn-ort/gl-ld/Pages/b21.aspx
• http://www.ratesupermarket.ca/blog/mortgage-rule-update-will-osfi-b21-impact/
Stay informed and up to date on the latest industry news – always! For more information please contact Purview For Lenders today by calling 1.855.787.8439.
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